Working from home? Here are some tax tips
With more of us working from home since COVID, here's what to know about filing your tax r...
26 Oct, 2022
- Great low rate available for purchases & refinancers
- Australian based experienced lending team to help with every step of your home loan journey
- Easy online process to find out if you would qualify
- In business since 2011 & backed by Australia's largest online lender
- No on-going fees, unlimited redraws & offset available for 0.10%
Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of February 21, 2023.
What Does Home Loan Refinancing Mean?
Home Loan Refinancing is when a borrower either switches their home loan product with a different one that usually has a lower rate under their existing or a new lender.
A refinance home loan refers to the home loan product borrowers switch to. Lenders sometimes offer a different set of home loans with their respective rates and features for refinancing applications.
Borrowers usually refinance their mortgages to get a lower rate or update their loan features and terms to keep up with the ever-changing lending landscape.
There are two types of refinancing:
- External – When you switch your loan to a mortgage product provided by another lender.
- Internal – When you switch your loan to a mortgage product provided by the existing lender.
When your home loan is left unchecked for quite some time, it can pale in comparison to the newer loan products being offered to new applicants. This makes it ideal for you to review your loans regularly and see if refinancing is necessary to ensure that your mortgage is still as competitive as the ones in the current market.
Why Should I Refinance My Home Loan? - The Benefits of Refinancing
While refinancing sounds as simple as switching loans or lenders, it is crucial to know that it is a viable financial strategy that could help you in many ways. Here are some instances where it would be best to refinance:
Access lower mortgage rates
Perhaps the most common reason why borrowers refinance is to access lower mortgage rates. Borrowers who stick to their current mortgage for too long usually incur the so-called “loyalty tax”. Lenders usually offer more competitive home loans to first-time buyers or new clients, especially in times when the official cash rate is lowered. This leaves existing borrowers with an interest rate that is a little bit higher compared to the new ones in the market.
Modify the length of the loan period
Another reason behind many refinancing applications is to change the loan period. Depending on your situation, you might feel the need to shorten or lengthen your amortization period.
In doing so, you can either pay more monthly but finish paying the home loan quickly or have lower regular repayments but for a longer loan period.
When you shorten your loan period, you must brace yourself for higher repayments. On the upside, you will be able to save a lot in interest charges in the long run.
On the other hand, spreading out your loan for a few more years will help ease the financial burden. This, however, will result in you paying more interest over time.
Take note that Lenders and Bank may have different conditions on allowing your Home Loan Refinancing, read this post: How Long Before You Can Refinance?
Switch mortgage terms
If you currently have a variable home loan and you want to be able to secure your interest rate, you will need to refinance to a fixed-rate mortgage.
You will be able to lock in your interest rate for a period of up to five years. This way, your mortgage rate will remain unaffected even with a potential rise in the official cash rate.
Refinancing to a variable rate might be tricky — if you are currently in the middle of a fixed term and you decided to switch to a variable rate, you might end up paying the break costs.
Remortgage to Release Equity
As time passes and as you pay off your home loan, you are also building up your equity in your home. This means that the proportion of the total value of your home that you actually own increases.
Many borrowers take advantage of their equity by refinancing. If the housing market is on an upside, there is a huge likelihood that their properties have appreciated as well.
Refinancing will allow you to take a portion of your built-up equity and use it to fund any big purchase, such as an investment property, a new car, or a renovation.
If you need a guide on Home Equity Loans in Australia, read this post: A Guide to Home Equity Loans in Australia
Consolidate debts
Refinancing also makes sense if you want to streamline all your other debts besides your mortgage into a single loan.
This makes sense when dealing with personal loans, which often have higher interest rates. Consolidating these loans to your home loan will allow you to free up space in your budget and manage your finances more efficiently.
Take note, however, that when you consolidate your other loans to your home loan, you will end up paying a slightly higher interest rate. Read this post for more details: Is Debt Consolidation a Good Idea?
What Does Home Loan Refinancing Cost?
The cost of refinancing usually involves upfront fees similar to when you first apply for a mortgage. Most of the time, these fees depend on whether you are refinancing externally or internally.
Application Fees
This fee comes in many names, including establishment fee and upfront fee. This one-off payment, which is usually charged when you refinance to a new lender, covers the administrative costs of setting up a new mortgage.
Valuation Fee
If you are applying under a new lender, it may require you to have your property assessed to its current market value.
Discharge Fees
This fee covers the administration costs required for your current lender to end your loan contract.
Break Costs
You will need to pay your lender this fee if you are within a fixed-term period when you refinance.
Settlement Fees
This will cover the costs of the settlement process if you refinance to a new loan under a new lender.
How to Refinance a Home Loan?
To start your refinancing plans, you need to first review your current home loan, its interest rate, and its features. You will have to compare your current mortgage against the new ones currently being offered in the market.
Before considering jumping to a new lender, ask your current lender first what options they could give you. Examine how much it would take to refinance according to your purpose.
You can speak to a mortgage broker to widen the scope of your options. A mortgage broker can help determine which lenders and loan products suit your current financial needs.
Once you have decided on the best option, prepare all the needed paperwork, submit your application and documentary requirements, and wait for approval.
If you are switching lenders, inform your current lender that you are refinancing. Your new and current lender will take care of the process after you get approval — you only need to prepare your wallets for the fees.
For a more detailed view, check out YourMortgage's guide to Home Loan Refinancing: A Step By Step Guide To Home Loan Refinancing
When Should You NOT Refinance
While refinancing is a viable financial strategy to relieve some of the stress you have with your mortgage, there are many scenarios where you are better off sticking with your current mortgage.
If you have a low credit score
This makes it necessary for you to review your credit score before attempting to apply for refinancing. Refinancing with a low credit score will only get you to a rate that is higher than your current one.
If you are still on a fixed term
It is advisable that you finish your fixed term first before you refinance to a new loan or a new lender to avoid the hefty break costs.
If your equity is below 20%
When you refinance with equity of below 20%, you will end up paying for lenders' mortgage insurance, which protects your lender in case you default on your loan.
If you are planning on selling soon
It may be wise to stick with your current mortgage if you are planning to list your home in the market soon, as the costs might only outweigh the benefits of refinance home loans.
Frequently Asked Questions
When you refinance, you are simply switching your current mortgage product with another that better fits your financial condition — this means that you will still be paying for one mortgage.
There are many reasons why you should refinance a mortgage but the most common reasons to do so include getting a lower rate; reducing monthly repayments; accessing built-up equity; and consolidating debts.
How much you can save depends on the reduction in mortgage rates you will be getting after you refinance. A small difference in interest can help you save a lot on your loan over the long term.
You should be able to refinance as often as it makes sense according to your financial needs. However, you might need to consider the costs refinancing involves and the rules and regulations of your chosen lender.
Ideally, you need at least 20% of equity before you refinance. You can still refinance with equity below 20% but you will need to pay lenders' mortgage insurance.
You can refinance a fixed-rate loan but doing so within the set fixed term will incur break costs.
Refinancing can be expensive depending on the circumstances surrounding your application. Typically, refinancing a home loan costs around 3% of the total loan amount but some lenders offer a no-cost refinancing option.
A no-cost option usually comes with a higher interest rate than the usual refinancing rate to cover any possible closing costs.
Applying for refinancing could lower your credit score, especially when the lender makes a hard check. The impact, however, is temporary and minimal given that refinancing only replaces an existing loan with another of the same amount.
Get help finding
the right home loan
Not sure which type of loan is best for your needs?
Your Mortgage can help you find out.
Since 1995 we've been helping Australians learn about home ownership, compare home loans and get help from home loan specialists to find the right home loan for them.
© 2023 Savings.com.au Pty Ltd · AFSL and Australian Credit License Number 515843
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. Read about how Savings Media Group manages potential conflicts of interest, along with how we get paid.
Savings.com.au Pty Ltd ACN 161 358 363 operates as an Australian Financial Services Licensee and an Australian Credit Licensee Number 515843. Savings.com.au is a general information provider and in giving you general product information, Savings.com.au is not making any suggestion or recommendation about any particular product and all market products may not be considered. If you decide to apply for a credit product listed on Savings.com.au, you will deal directly with a credit provider, and not with Savings.com.au. Rates and product information should be confirmed with the relevant credit provider. For more information, read Savings.com.au's Financial Services and Credit Guide (FSCG) The information provided constitutes information which is general in nature and has not taken into account any of your personal objectives, financial situation, or needs. Savings.com.au may receive a fee for products displayed.
